History of pooling of interests: Accounting for business combinatons in the United States

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The Accounting Historians Journal Vol. 18, No. 2 December 1991
Frank R. Rayburn and Ollie S. Powers
THE UNIVERSITY OF ALABAMA AT BIRMINGHAM
A HISTORY OF POOLING OF INTERESTS
ACCOUNTING FOR BUSINESS COMBINATIONS IN THE UNITED STATES
Abstract: This paper traces the development of pooling of interests accounting for business combinations from 1945 to 1991. The history of the pooling concept is reviewed chronologically with particular em-phasis on the events of 1969-1970 that were related to the most recent pronouncement on the subject, Accounting Principles Board (APB) Opinion No. 16. Early in its life (1974), the Financial Accounting Stan-dards Board (FASB) placed a project on its agenda to reconsider pool-ing of interests accounting. That project was removed from the FASB's agenda in 1981. APB Opinion No. 16 has gone essentially unchanged as it relates to the accounting for a business combination as a pooling of interests. Resolution of implementation issues has been left largely to the Securities and Exchange Commission and the accounting pro-fession. The FASB has a project on its agenda on Consolidations and Related Matters that may impact pooling of interests accounting. There also is some pressure for the FASB to revisit accounting for business combinations.
Current authoritative literature, Accounting Principles Board (APB) Opinion No. 16, "concludes that the purchase method and the pooling of interests method are both acceptable in accounting for business combinations, although not as alternatives in ac-counting for the same business combination" [par. 8]. If a busi-ness combination meets all twelve specified conditions [see APB Opinion No. 16, Pars. 46-48], it must be accounted for as a pooling of interests. All other business combinations must be accounted for as purchases.
The pooling of interests method of accounting for business combinations has generated debate since its inception. In a pool-ing of interests, a new basis of accounting is not permitted. Rather, the assets and liabilities of the combining companies are carried forward at their recorded amounts and retained earnings of the companies are combined [APB Opinion No. 16, Par. 12].